This year's best performers on the

Nasdaq Composite Index

are not last year's headline grabbers. They're generally relative unknowns toiling on the fringe of the market. Think regional banks lurking in the megabanks' shadow and boutique technology outfits nipping at the next big thing. Think fourth place in the industry. Think small floats and

market caps of less than $3 billion.

Analysts say the combination of interest-rate cuts and speculation in certain

small-cap companies ahead of the

Russell 2000's

rebalancing in June have helped relative unknowns in the areas of technology, finance and medicine hit new 52-week highs. The companies hitting new price peaks tend to have quiet, but compelling growth stories and improving financial prospects.

Despite the sharp market downturn of the past year, investors have remained focused mainly on the Nasdaq's

large-cap offerings. Over the past six months, they've missed out on companies that were outperforming.

During the past year,

The Wall Street Journal

and

The New York Times

have mentioned only

Sovereign Bancorp

(SVRN)

in passing. This Philadelphia-based regional bank, one of the 50 largest banks in the country, recently ran up to a new 52-week high, topping the Nasdaq's leaderboard as investors pushed it and other small- and

mid-cap financials like

Popular

(BPOP) - Get Report

,

Coastal Bancorp

(CBSA)

and

BankUnited Financial

(BKUNA)

higher.

FEI

(FEIC)

, a former subsidiary of electronics juggernaut

Philips

based in Hillsboro, Ore., makes equipment to analyze next-generation semiconductors, like the 300 millimeter wafer touted by

Intel

(INTC) - Get Report

and rival

Advanced Micro Devices

(AMD) - Get Report

as the next superchip. Since the start of the year, FEI has shot up 63%. Only three Wall Street analysts cover it.

Even bigger names, like medical equipment maker and

S&P 500 member

Biomet

(BMET)

haven't gained as much attention as former highfliers -- and that's despite the fact Biomet has run up 13% this year. It hit a 52-week high on Monday. Other medical equipment names, like

Cima Labs

(CIMA)

,

Cytyc

(CYTC)

and

VidaMed

(VIDA)

, are trading near new highs.

On the

New York Stock Exchange, the number of

stocks hitting new highs has grown along with the market's gains since early April. But those names, like

3M

(MMM) - Get Report

and

Kmart

(KM)

, have massive market caps and stories that most Wall Streeters can recite from memory. The gains in Sovereign, FEI and Biomet, by contrast, highlight how today's big winners on the Nasdaq have quietly usurped the winner's circle from larger names, only with far less fanfare.

The Regional Phoenix

In Sovereign Bancorp's case, this year's gains are rooted in the stock's terrible performance in 1999. That year, the bank's stock fell 50% as the company expanded in the New England market. Last year, the company bought 287

FleetBoston

(FBF)

branches that were being divested for $1.4 billion, racking up a lot of debt just as the economy was beginning to decline.

John Kline, a managing director for

Sandler O'Neill

, said the move scared investors who were worried about asset quality and Sovereign's ability to succeed in the competitive New England market.

In the past year, Kline says the company improved its equity-to-asset ratio, raised equity through a small offering and decreased its exposure to nonperforming loans. In a meeting with analysts on April 24, CEO Jay Sidhu outlined his plan to increase earnings per share by $2 by 2005. The company has a

price-to-earnings ratio of 10, lower than the 17.65 average for banks.

Add five

Fed cuts and investors took notice. "All of those negatives, with people saying they're losing market share, that they've got too many nonperformers, that they're going to go out of business -- the company overcame that," said Klein, who rates the stock a buy. "The worst-case scenario was built into the stock. And a lot of the uncertainty came out of the stock."

That said, there are some risks. Both Klein and Jim Ackor, an analyst with

Tucker Anthony

, say Sovereign should trade at a discount to peers because of its still-heavy debt load. In fact, Ackor still doesn't like the stock, saying that a "full-blown recovery" would have to be in the works for the company to continue to rack up gains.

The analysts say the stock prices of regional thrifts, small savings and loans, and other financial companies will stay relatively strong because of the Fed's recent rate-cutting. Indeed, the

Nasdaq Financial 100

, which tracks the exchange's large financial companies, took a huge hit in March and April but has since returned to the record highs reached in December. And Sovereign now plans to leave the Nasdaq for the more staid New York Stock Exchange.

The Growth Story

Investors have also started to look away from larger companies like

Cisco

(CSCO) - Get Report

and

Intel

to try to discover new growth stories. Thermal-camera maker

Flir Systems

(FLIR) - Get Report

, integrated-circuit maker

Genesis Microchip

(GNSS)

and power-management chipmaker

Microsemi

(MSCC)

joined FEI on the 52-week-high list in recent trading sessions.

Unlike Sovereign, FEI's recent performance has less to do with executing on its business plan and more to do with adding more shares.

Needham

analyst Christina Osmena used to field phone calls from would-be investors who were unable to take positions in FEI because there weren't enough shares available. The company, however, recently added 9 million common shares, a moved that helped prompt some of its recent gains. (Needham has a banking relationship with FEI.)

Osmena called FEI "a sleeper hit" and sees a great deal of upside if the company can get its dual beam scanning equipment onto manufacturing floors. Companies engaged in the production of next-generation 300 mm chips are forced to break them, at a cost of $700 to $800 per chip, in order to judge their efficacy -- something that drives costs much higher. Osmena says this will be a challenge for FEI -- whose equipment allows companies to examine the chips without breaking them -- because it competes against Japanese rivals

Seiko

and

Jeol

.

As of May 18, FEI had a price-to-earnings ratio of 39.84, which is higher than the scientific and technical instrument industry average of 29.24. And the problem of its limited volume may not have vanished entirely. In the past 30 days, FEI's average daily volume was around 430,000, higher than the 12-month average of 140,000 shares a day but still modest by market standards.

The Medical Alternative

Medical equipment makers are seen as a stable source of income because neither economic downturns nor the Fed can do very much to curb business. When someone breaks a hip, money isn't that much of an issue. Several medical stocks with puny market caps -- many less than $100 million -- are seeing their stocks jump along with bigger names like Cima Labs and

Vidamed

(VIDA)

.

So, where FEI and Sovereign were overlooked by much of the market, Biomet wasn't. It's part of the S&P 500 and the fourth-largest maker of orthopedic equipment, making and selling items like hip replacement kits.

Robert W. Baird

analyst Suey Wong credited the upside of the $7 billion market-cap company to an easy pricing environment that allows Biomet to charge high prices for its wares. She also likes the company's strength across a variety of product lines and its position as one of few pure-play investments in a space where diverse giants like

Johnson & Johnson

(JNJ) - Get Report

compete.

"You don't have economic downturn issues with respect to proven medical technology franchises -- they're better places to be," says Kate Sharadin, an analyst with

Gerard Klauer Mattison

. She says many investors have turned to the steady growth in the medical equipment business to offset risks elsewhere, but they might be overbought soon. "Valuations? Now we wrestle with them. When does money start to flow out? How long can all the good news be sustained?"

And Biomet's price-to-earnings ratio has skyrocketed along with those of its peers. As of May 18, it was 42.08, much higher than the medical supply industry's average of 35.73. The average PE of stocks in the S&P 500 is 29.62.

Sharadin is positive about Biomet's long-term future, pointing out that Baby Boomers are aging and providing a steady stream of new customers for its products. At the same time, she says the company is moving toward younger clients, promoting products targeting the sports medicine crowd. Citing an "emotional resistance" by hospital staff to paying such high prices for orthopedic equipment, the analyst says a pricing problem could come to a head by the end of the year. Simply put, doctors don't like charging that much for a desperately needed hip replacement.

Think Small, Win Big?

For some investors, the biggest enticement for buying small is winning big later. "For a large part, some of the growth prospects are coming from these companies. Biomet is a classic example of a company that was out of the spotlight. At the time the fundamentals were changing for Biomet, the market didn't notice it because the focus was on technology," said Travis Pascavis, a stock analyst for

Morningstar

who covers Biomet.

Pascavis points out that smaller companies tend to trade at a discount to larger companies. When the gap gets too severe, a correction occurs, not unlike what caused the stocks of Biomet, Sovereign and FEI to rise.

The current lineup of Nasdaq stocks at 52-week highs may be littered with small companies in industries that few understand, and it can be hard for bigger players to invest. "The smaller guys are hard for big guys to invest in because some of these companies don't have the average daily volume," he said. "It would take forever to sell out of a position."

They may be fourth-place unknowns with tiny day-to-day volumes. Their tickers may seem like what's left after a bowl of Alpha-Bits cereal, but the companies are proving real winners for some individual investors.